Donald Trump’s election today will naturally cause quite a stir in the global economy, as the world recalibrates to this major turning point in recent American history.
In the Telegraph last month I wrote an article about the panicked reaction of some investors to the UK’s departure from the EU. In the face of another unexpected public vote, I feel that some sentiments from this article would be useful to recall, and will hopefully be food for thought for anyone considering how to respond to today’s news.
One must remember that there is often a big difference between campaign promises made and policy delivered. The long-term ramifications of today’s result are impossible to fully predict and our Head of Research and Strategy Patrick Gordon has written a view from floor which can be accessed here.
The hidden dangers of DIY investing
The last two years have been quite a rollercoaster for stock market investors. From a high of 7100 toward the end of April 2015 the FTSE 100 declined by 22% to just over 5500 in February this year as considerable nervousness about China took hold. Andrew Roberts, an analyst at RBS, even penned a note headlined “Sell Everything” that attracted considerable media coverage.
The FTSE 100 subsequently rallied to 6400 in April, only to fall around 8% a week before the referendum vote. It then rallied by almost the same amount on the day of the referendum before falling back again shortly afterwards. We started this month at 6,900 points, a rally of nearly 25% from the February lows as the following chart shows.
The importance of ignoring the herd
During January and February a total of £862m was withdrawn from equity funds, numbers that reveal a high degree of panic on the part of retail investors. However, things got even worse over the “Brexit” period of June and July, when a net total of £4.5bn was withdrawn. By comparison with these total net withdrawals of around £5.4bn, I was pleased (and not surprised) to see that our clients invested a net total of £10.6m over these four months.
I am not trying to make the point that we were better readers of the market than our peer group of other “Full Service” advisory firms, some of whom may have performed even better. No, my purpose is to draw attention to one of the costs of being a DIY investor that is never fully recognised, asset allocation. Based on the subsequent rise in the market and taking an average value for the FTSE 100 Index over each of the four months and assuming that these funds were not reinvested back into the market, I estimate that the amount of money lost by retail investors who panic-sold to the end of September was close to £600m.
The value of advice
We are frequently told, correctly, that active investment is more expensive than passive, which essentially involves using index trackers. However, comparing the cost of active versus passive makes absolutely no allowance for these big calls about whether to be in or out of the market.
Being a DIY investor can be a lonely place in a volatile market where there is a temptation to follow the herd in the belief that the herd knows where it is going, and there is no one else to turn to for advice. That’s why I believe that all but the most experienced investors should be supported and advised by a seasoned investment professional.
We encourage you to contact your investment manager if you would like to discuss any of this further.
Or, if you are new to Killik & Co you can contact us on [email protected]